Question
answer the below questions, they are independent. A) Suppose there is only one factor F. Returns of individual security i can be expressed as ri
answer the below questions, they are independent.
A) Suppose there is only one factor F. Returns of individual security i can be expressed as ri = E {ri }+ F + ei where ei is an idiosyncratic risk that can be diversified away. Then what does the APT say about the risk premium of well-diversified portfolio? Clearly explain the reasoning of the APT (this doesnt have to be a mathematical proof).
B) Suppose there is only one factor F. You are also given the following data: Risk free rate= 3%. Expected return of well-diversified portfolio A = 12%. of portfolio A = 1. If of portfolio B is 0.5, what would be the expected return of portfolio B?
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